It’s no secret that the IRS is after crypto tax dollars and after fans of crypto who don’t report or who don’t do it correctly. The Inflation Reduction Act, which passed the Senate on Sunday, raises taxes and will give the IRS billions to go into what the Wall Street Journal called “beast mode.” In all, the bill will dole out about $80 billion to the IRS for increased enforcement, operational improvements, customer service, and systems modernization. That $80 billion is more than six times the current annual IRS budget of $12.6 billion. The bill says a whopping $45.6 billion will be for enforcement, which is the main directive from Democrats to the IRS. Get bigger, tougher and faster at collecting. Reports suggest that the IRS will hire 87,000 new agents, and with $45 billion being shoveled into IRS “enforcement,” change is coming. There isn’t a dollar amount fixed for going after crypto, but the new law vaguely says they’ll be specifically pursuing “digital asset monitoring and compliance activities,” apart from more general tax enforcement. Think audits, collections and worse. The IRS is updating it forms too. There is already a virtual currency question at the top of the tax return you filed—or still need to file—for 2021. As we will see, that question will be tougher for 2022.
For 2021 returns, the seemingly innocuous question asked, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS says that all taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either “Yes” or “No” to the virtual currency question. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021. You can read the IRS reminder here.In taxes, a simple yes or no question can be a surprisingly big deal—if you answer wrong. But can you check “No?”
Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box when they have not engaged in any transactions involving virtual currency during the year, or their activities were limited to: (1) Holding virtual currency in their own wallet or account. (2) Transferring virtual currency between their own wallets or accounts. (3) Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal
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But many taxpayers must check “Yes.” Here are most common transactions in virtual currency that require checking the “Yes” box: (1) The receipt of virtual currency as payment for goods or services provided; (2) The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift; (3) The receipt of new virtual currency as a result of mining and staking activities; (4) The receipt of virtual currency as a result of a hard fork; (5) An exchange of virtual currency for property, goods, or services; (6) An exchange/trade of virtual currency for another virtual currency; (7) A sale of virtual currency; and (8) Any other disposition of a financial interest in virtual currency.
For 2022 tax returns, the IRS has modified the crypto question asked on Form 1040. A draft of IRS Form 1040 for 2022 now reads:
- “At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
This casts the net wider than the prior version. In general, the IRS gift and estate tax people are distinct from IRS income tax personnel. But the expansion of the crypto tax question may just herald more to come, more crypto audits, more IRS scrutiny on crypto and crypto taxpayers, and more money being poured into IRS compliance generally. Be careful out there.